DATE: 20010409
DOCKET: C34941
COURT OF APPEAL FOR ONTARIO
MCMURTRY C.J.O., BORINS AND MACPHERSON JJ.A.
IN THE MATTER OF the Bankruptcy of VANDERWOUDE LANDSCAPE SUPPLY (FONTHILL) LTD. of the City of Thorold, in the Regional Municipality of Niagara, in the Province of Ontario
B E T W E E N:
IKE VANDERWOUDE and VANSWAN PROPERTIES INC.
William D. Dunlop for the appellants
Appellants
- and -
SCOTT AND PICHELLI LIMITED, J.P. GRACI & ASSOCIATIES LTD. and J.P. GRACI
Rosemary A. Fisher
for the respondents
Respondents
HEARD: March 5, 2001
On appeal from the judgment of Justice Ian Nordheimer dated August 15, 2000.
MACPHERSON J.A.:
A. OVERVIEW
[1] In March 1998, a landscape supply company in the Niagara peninsula made a voluntary assignment in bankruptcy. A trustee was appointed. In less than a month, the trustee arranged for the sale of most of the assets of the company. The proceeds from this sale were distributed to a single secured creditor, Niagara Credit Union Limited (“NCU”).
[2] Two other secured creditors, whose security ranked behind NCU’s, were unhappy with the trustee’s administration of the estate. They brought a motion before Registrar Ferron seeking leave, pursuant to s.215 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c.B-2 (“BIA”), to issue a Statement of Claim against the trustee. Registrar Ferron refused to make such an order.
[3] The creditors appealed Registrar Ferron’s decision to the Superior Court of Justice. Nordheimer J. dismissed the appeal. The creditors then appealed to this court. The appeal raises the issue of the circumstances in which a disgruntled creditor can sue the trustee for the manner in which the trustee administers the estate of a bankrupt.
B. FACTS
(1) The parties and the events
[4] The appellants, Ike Vanderwoude (“Vanderwoude”) and Vanswan Properties Inc. (“Vanswan”), are secured creditors of the bankrupt Vanderwoude Landscape Supply (Fonthill) Ltd. (“VLS”). VLS owes the appellants approximately $900,000.
[5] The respondents, Scott and Pichelli Limited, J. P. Graci & Associates Ltd. and J. Paul Graci (“the trustee”), are the trustee in bankruptcy of the estate of VLS.
[6] In March 1991, Vanderwoude entered into an agreement with James Peckham (“Peckham”) to sell him the division of Ike Vanderwoude Landscape Supply Ltd. located in Fonthill. Peckham incorporated a new company and, with Vanderwoude’s consent, changed the name of the company to VLS.
[7] The agreement entered into by Peckham included the purchase of the assets and the real property of the Fonthill operation. The real property was owned by Vanswan, a corporation controlled by Vanderwoude’s wife. The total purchase price was $1,150,000.
[8] In 1994, Vanswan agreed to assume some of VLS’s debt. In return for assuming the debt, Vanswan received from Peckham a pledge of all the shares in VLS and a promissory note requiring VLS to pay Vanswan $981,092.30 by way of monthly instalments of $6871.72. The 1994 agreement also provided that VLS could not commit an act of bankruptcy or go into liquidation without Vanswan’s consent. Pursuant to the 1994 agreement, Vanswan registered a mortgage of $981,092.30 against VLS’s property.
[9] In April 1997, VLS entered in a security agreement with Vanderwoude wherein VLS granted Vanderwoude general and continuing security for the payment of all of VLS’s indebtedness.
[10] Unfortunately, by 1998 VLS was in serious financial difficulty. On February 25, 1998, Vanswan served on VLS a Notice of Intention to Enforce Security. On March 18, 1998, VLS made a voluntary assignment in bankruptcy. It did not seek Vanswan’s consent to this course of action, as it was required to do by its 1994 agreement with Vanswan.
[11] Four days before making the voluntary assignment in bankruptcy, the trustee had received an appraisal of VLS’s assets. The appraised assets consisted of rolling stock and equipment, inventory (gravel, concrete mix, landscape stones and rocks, fibreglass ponds and cedar siding) and office equipment. The appraiser, John DeRonde and Associates, valued the assets at approximately $205,000 “if sold within 30 days, by auction on site”.
[12] On March 25, the trustee accepted a second appointment – agent for NCU, which VLS owed approximately $157,000.
[13] On March 26, the trustee agreed to sell VLS’s assets to The Brickyard of Canada Inc. (“Brickyard”) for $180,000. At the time, Peckham was an employee of Brickyard. The sale closed on April 10, 1998.
[14] On April 6, the trustee received an independent legal opinion from Agro, Zaffiro, Parente, Orzel and Baker in Hamilton to the effect that “it would appear that Niagara Credit Union Limited has first charge” on the proceeds of the sale of VLS’s assets.
[15] On April 7, the first meeting of VLS’s creditors took place. Vanderwoude attended, representing Vanswan. Herman Faber, a solicitor, attended, representing Vanderwoude. Faber was appointed an inspector. The minutes of the meeting record, inter alia:
CREDITOR OBJECTIONS
No objections are raised as a result of any decision taken during the meeting.
TRUSTEE INSTRUCTIONS
No instructions are provided to the trustee in respect of the administration of the estate.
[16] A year later, on April 23, 1999, the trustee prepared a Final Statement of Receipts and Disbursements. It showed that the secured creditor NCU had realized $157,596.70 from the estate of VLS. Mr. Faber approved the trustee’s final statement.
(2) The litigation
[17] On April 11, 2000, Vanderwoude and Vanswan brought a motion pursuant to s. 215 of the BIA to commence an action against the trustee. Section 215 provides, inter alia:
- Except by leave of the court, no action lies against . . . a trustee with respect to any report made under, or any action taken pursuant to, this Act.
[18] Registrar Ferron refused to grant leave. He held that the trustee was not obliged to give effect to the provisions in the VLS-Vanswan agreement requiring VLS to obtain Vanswan’s consent before committing an act of bankruptcy or going into liquidation. He also held that when the trustee sold VLS’s assets to Brickyard, he was acting in his capacity as agent of the secured creditor NCU, not as trustee of the estate of VLS.
[19] Vanderwoude and Vanswan appealed Registrar Ferron’s decision. On August 15, 2000, Nordheimer J. dismissed the appeal. In essence, he agreed with both components of Registrar Ferron’s reasons.
[20] Vanderwoude and Vanswan appealed from Nordheimer J.’s decision.
C. ISSUE
[21] The sole issue on this appeal is whether Nordheimer J. erred by not granting leave to the appellants to commence their proposed action against the trustee.
D. ANALYSIS
[22] The test for making an order under s. 215 of the BIA was recently summarized by Charron J.A. in Society of Composers, Authors and Music Publishers of Canada v. Armitage (2000), 2000 16921 (ON CA), 50 O.R. (3d) 688 at 690 (C.A.):
[T]he evidence required to support an order under s. 215 must be sufficient to establish that there is a factual basis for the proposed claim and that the proposed claim discloses a cause of action. However, the evidence does not have to be sufficient to enable the motions judge to make a final assessment of the merits of the proposed claim. The sufficiency of the evidence must be measured in the context of the purpose of s. 215, which is to prevent the trustee from having to respond to actions which are frivolous or vexatious or which do not disclose a cause of action: see Mancini (Trustee of) v. Falconi (1993), 61 O.A.C. 332 at 337 (C.A.)
[23] The causes of action which the appellants would like to assert against the trustee are negligence, conversion, breach of fiduciary duty and breach of trust. In support of these claims, the appellants point to two areas of alleged misconduct on the part of the trustee – (1) his failure to give effect to the requirement in the VLS-Vanswan agreement that VLS would not commit an act of bankruptcy without Vanswan’s consent; and (2) his decision to sell VLS’s assets to Brickyard which, the appellants say, was tainted because the principal of VLS was also an employee of Brickyard and because the sale price of $180,000 was less than the appraised value of the assets and was not obtained at a public auction.
[24] On the first point advanced by the appellants, Nordheimer J. concluded that the trustee was not bound by the term in the VLS-Vanswan agreement. He said: “To hold otherwise would greatly hamper the Trustee in performance of his duties and obligations to administer the Estate of the bankrupt”.
[25] I agree. When VLS made a voluntary assignment in bankruptcy, it had six secured creditors and 64 unsecured creditors. Debts totalled about $1.2 million and the deficiency in the estate was $572,000. A trustee in bankruptcy must take into account the interests of the debtor and of all the creditors. To require the trustee to be bound by an agreement between the bankrupt and a single creditor would be inconsistent with this fundamental obligation. In short, if the appellants have a claim on this issue, it is one against VLS and its principal, Peckham, and not against the trustee.
[26] With respect to the appellant’s second point, which relates to both the process and the proceeds of the sale of VLS’s assets conducted by the trustee, Nordheimer J. did not consider it on the merits because he concluded that “[o]n balance the evidence very strongly suggests that he Trustee was acting in its capacity as agent for the secured creditor in effecting this sale. . . .”
[27] The appellants submit that this conclusion is in error because of a term in the agreement appointing the trustee as NCU’s agent which provided that “such Agent shall so far as concerns responsibility for its acts, be deemed the Agent of the Debtor and in no event the Agent of the Secured Party”.
[28] At first glance, the appellants’ argument is an attractive one. However, it fails, as Nordheimer J. explicitly recognized, because of this court’s decision in Peat Marwick Ltd. v. Consumers Gas Co. (1980), 1980 1850 (ON CA), 29 O.R. (2d) 336 (C.A.) where Houlden J.A. considered a virtually identical provision and explained, at p. 344:
It seems to me that the receiver and manager in a situation, like the present, is wearing two hats. When wearing one hat, he is the agent of the debtor company; when wearing the other, the agent of the debenture holder. In occupying the premises of the debtor and in carrying on the business, the receiver and manager acts as the agent of the debtor company. In realizing the security of the debenture holder, notwithstanding the language of the debenture, he acts as the agent of the debenture holder, and thus is able to confer title on a purchaser free of title. [Emphasis added.]
Accordingly, it follows that, when the trustee sold VLS’s assets to Brickyard, it was able to confer title to the assets on Brickyard because it was acting as NCU’s agent, not the bankrupt debtor’s agent.
[29] There is a second reason, not adverted to by Nordheimer J. or Registrar Ferron, why the appellants’ argument about the trustee’s sale of VLS’s assets must be rejected. Vanderwoude and Vanswan were both represented at the first meeting of the VLS’s creditors on April 7, 1998. Indeed, Vanderwoude was there in person. In his affidavit, the trustee, J. Paul Graci, states:
21.The fact of the valid security interest being held by Niagara Credit Unit was disclosed at the First Meeting of Creditors, and, moreover, the sale of the assets for the benefit of Niagara Credit Union was also disclosed at that meeting.
There is nothing in the record to contradict the trustee’s statement. Against this background, it is important to recall what the minutes of the meeting record:
CREDITOR OBJECTIONS
No objections are raised as a result of any decision taken during the meeting.
TRUSTEE INSTRUCTIONS
No instructions are provided to the trustee in respect of the administration of the estate.
[30] Moreover, it should be noted that Mr. Faber, a solicitor representing Vanderwoude, was appointed an inspector at the first meeting of creditors. He did not object to the sale of VLS’s assets to Brickyard; indeed, he made no comments concerning the sale. As well, the trustee prepared his Final Statement of Receipts and Disbursements, which included an acknowledgement that NCU had realized $157,596.70 on its security. Mr. Faber approved the trustee’s statement.
[31] I conclude that the appellants knew what the trustee proposed to do, and in fact did, with respect to the sale of VLS’s assets. They made no objection until two years later when they brought their motion seeking leave to commence an action against the trustee. In my view, the appellants’ conduct counts strongly against permitting the action to proceed.
[32] For all of these reasons, I conclude that both Nordheimer J. and Registrar Ferron were correct in refusing to grant the appellants leave pursuant to s. 215 of the BIA to commence an action against the trustee of the estate of the bankrupt VLS.
E. DISPOSITION
[33] I would dismiss the appeal with costs.
RELEASED: April 9, 2001
“J. C. MacPherson J.A.”
“I agree R. Roy McMurtry C.J.O.”
“I agree S. Borins J.A.”